US Bank 2012 Annual Report Download - page 55

allowance, net of any expected reimbursement under any loss
sharing agreements with the FDIC, exceeds any remaining
credit discounts.
The evaluation of the appropriate allowance for credit
losses for purchased impaired loans in the various loan
segments considers the expected cash flows to be collected
from the borrower. These loans are initially recorded at fair
value and therefore no allowance for credit losses is recorded
at the purchase date.
Subsequent to the purchase date, the expected cash flows
of purchased loans are subject to evaluation. Decreases in the
present value of expected cash flows are recognized by
recording an allowance for credit losses with the related
provision for credit losses reduced for the amount
reimbursable by the FDIC, where applicable. If the expected
cash flows on the purchased loans increase such that a
previously recorded impairment allowance can be reversed, the
Company records a reduction in the allowance with a related
reduction in losses reimbursable by the FDIC, where
applicable. Increases in expected cash flows of purchased loans
and decreases in expected cash flows of the FDIC
indemnification assets, when there are no previous impairment
allowances, are considered together and recognized over the
remaining life of the loans. Refer to Note 1 of the Notes to
Consolidated Financial Statements, for more information.
The Company’s methodology for determining the
appropriate allowance for credit losses for all the loan
segments also considers the imprecision inherent in the
methodologies used. As a result, in addition to the amounts
determined under the methodologies described above,
management also considers the potential impact of other
qualitative factors which include, but are not limited to,
economic factors; geographic and other concentration risks;
delinquency and nonaccrual trends; current business
conditions; changes in lending policy, underwriting standards,
internal review and other relevant business practices; and the
regulatory environment. The consideration of these items
results in adjustments to allowance amounts included in the
Company’s allowance for credit losses for each of the above
loan segments. Table 19 shows the amount of the allowance
for credit losses by loan segment, class and underlying
portfolio category.
Although the Company determines the amount of each
element of the allowance separately and considers this process
to be an important credit management tool, the entire
allowance for credit losses is available for the entire loan
portfolio. The actual amount of losses incurred can vary
significantly from the estimated amounts.
Residual Value Risk Management The Company manages its
risk to changes in the residual value of leased assets through
disciplined residual valuation setting at the inception of a
lease, diversification of its leased assets, regular residual asset
valuation reviews and monitoring of residual value gains or
losses upon the disposition of assets. Commercial lease
originations are subject to the same well-defined underwriting
standards referred to in the “Credit Risk Management”
section which includes an evaluation of the residual value risk.
Retail lease residual value risk is mitigated further by
originating longer-term vehicle leases and effective end-of-
term marketing of off-lease vehicles.
Included in the retail leasing portfolio was approximately
$3.8 billion of retail leasing residuals at December 31, 2012,
compared with $3.4 billion at December 31, 2011. The
Company monitors concentrations of leases by manufacturer
and vehicle “make and model.” As of December 31, 2012,
vehicle lease residuals related to sport utility vehicles were
55.9 percent of the portfolio, while mid-range and upscale
vehicle classes represented approximately 17.9 percent and
13.8 percent of the portfolio, respectively. At year-end 2012,
the largest vehicle-type concentration represented 7.5 percent
of the aggregate residual value of the vehicles in the portfolio.
At December 31, 2012, the weighted-average origination term
of the portfolio was 41 months, compared with 42 months at
December 31, 2011.
Since the beginning of 2009, used vehicle prices have
increased substantially as sales of new vehicles were affected
by the financial condition of the automobile manufacturers,
various government programs and involvement with the
manufacturers, and consumers’ preference for used, instead of
new, vehicles due to uncertainty about the economy. As
economic conditions continue to improve, new vehicle sales
and production have increased and the demand for, and price
of, used vehicles has begun to decrease.
At December 31, 2012, the commercial leasing portfolio
had $567 million of residuals, compared with $620 million at
December 31, 2011. At year-end 2012, lease residuals related
to trucks and other transportation equipment were 33.2
percent of the total residual portfolio. Business and office
equipment represented 24.4 percent of the aggregate portfolio,
while railcars represented 11.9 percent and manufacturing
equipment represented 10.0 percent. No other concentrations
of more than 10 percent existed at December 31, 2012.
Operational Risk Management Operational risk represents the
risk of loss resulting from the Company’s operations,
including, but not limited to, the risk of fraud by employees or
persons outside the Company, unauthorized access to its
computer systems, the execution of unauthorized transactions
by employees, errors relating to transaction processing and
technology, breaches of internal controls and in data security,
compliance requirements, and business continuation and
disaster recovery. Operational risk also includes the potential
legal actions that could arise as a result of an operational
deficiency or as a result of noncompliance with applicable
regulatory standards, adverse business decisions or their
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